Banking scandal: how document trail reveals global scam

It's not a comfortable weekend for the men heading some of the world's biggest banks. Barclays has already been hit by a £290m fine for rigging interest rates but that could be dwarfed by a series of global lawsuits which could cost banks billions

Questions are being asked about the City's ability to police itself over interest rates Photograph: Stefan Rousseau/PA

The interest rate rigging scandal that has engulfed Barclays was the result of a coordinated attempt at collusion by traders working for a coterie of leading banks over at least five years, according to a series of lawsuits and legal rulings filed in courts in Asia and North America.

The lawsuits allege the fraud was extensive, spanning at least three continents and involving trades worth tens of billions of pounds. The allegations raise further serious questions about the banks' ability to police themselves and the role of senior management in monitoring the activities of their employees.

In a 28-page statement of facts relating to last week's revelation that Barclays had been fined a total of £290m, the US Department of Justice discloses how a network of traders working on both sides of the Atlantic conspired to influence both the Libor and Euribor interest rates – the rates at which banks lend to each other. It was, in effect, a worldwide conspiracy against the free functioning of the market.

The size of the fines was significant and the opprobrium heaped on Barclays unremitting. "This is the most damaging scam I can recall," said Andrew Tyrie, chair of parliament's Treasury select committee. "It appears that many banks were involved and Barclays were the first to own up."

Indeed, as politicians bay for his blood this weekend, the one source of comfort for Bob Diamond, the embattled Barclays chief executive, is that his bank appears to have been merely one of several involved in the scandal.

For their own sake, many of his fellow senior bankers will be hoping this weekend that he does not go the way of Northern Rock's Adam Applegarth and RBS's Fred Goodwin – ousted by a tidal wave of public fury.

Until last week few people outside the world of banking would even have been aware of Libor and fewer still would have appreciated that it can exert a significant influence over their lives. But many people have mortgages linked to Libor and fluctuations in its rate can affect the size of their monthly home loan repayments.

More significant, however, is the effect manipulating Libor would have on investment and pension funds who buy complex financial products – commonly known as derivatives – linked to interest rates.

At least one major financial institution – the US broker, Charles Schwab – alleges in a lawsuit filed in April that its "funds did not receive their rightful payments on those instruments" suggesting a plethora of similar lawsuits seeking compensation could soon be issued.

The Department of Justice document states that the collusion between traders across a range of banks, including Barclays, took place from at least August 2005 through to least May 2008. It states: "Those interbank communications included ones in which certain Barclays swaps traders communicated with former Barclays swaps traders who had left Barclays and joined other financial institutions.

"The likelihood that the Libor or Euribor fix would be affected increased when other… banks also manipulated their submissions as part of a coordinated effort."

It is understood at least 16 banks in addition to Barclays are being investigated. Inquiries into alleged market manipulation are being carried out in the UK, the US, Japan, Canada, the European Union and Singapore and involve nine government agencies.

The lawsuit filed by Charles Schwab against a number of banks including Barclays, HSBC, Lloyds and RBS, whose chief executive Stephen Hester is under fire over June's IT problems that left customers unable to withdraw cash, shines light on the scale of the alleged scandal.

Schwab's lawyers hired independent experts to examine the banks' trades during the "critical two-week period following the bankruptcy of Lehman Brothers".

The experts looked at submissions each of the banks made to the Libor Panel of the British Banking Association – which oversees the interbank lending rate. A high Libor rate submission indicates a bank is struggling to borrow from other lenders. A low rate indicates the opposite. Submissions are therefore viewed as a sign of a bank's financial health.

According to the lawsuit, each bank studied by Schwab's experts "dramatically increased its collusive suppression of Libor" – effectively conspiring to keep rates low. The lawsuit cites claims that the "underreporting of Libor had a $45bn effect on the market, representing the amount borrowers [the banks] did not pay" investors who had bought its financial products.

The focus now is on who participated in the collusion. Last May Canada's Competition Bureau filed an affidavit against a number of banks, including HSBC Bank Canada, and Royal Bank of Scotland NV, demanding staff hand over emails and other documents.

Bureau investigators want to determine whether the banks conspired to fix derivative interest rates, a major form of market manipulation. According to the affidavit, one bank which has turned whistleblower and agreed to help the Canadian authorities with its investigation, the banks "communicated with each other... to form agreements..." which "was done for the purpose of benefiting trading positions".

One trader at the whistleblower bank is alleged to have communicated with traders at HSBC, Deutsche Bank, RBS, JP Morgan and Citibank.

The crucial question is whether the traders were acting on their own or were doing so with the backing, or at the very least, the knowledge of senior managers. Certainly there are allegations senior management at at least one bank was aware what was happening.

A lawsuit filed in Singapore by a former RBS trader, fired by the bank, alleges it was "common practice" among RBS's senior employees to make requests for the Libor submissions to be set at certain rates. RBS rejects the claim.

Barclays too denies that senior management were aware of what was happening on the trading desks. Diamond accepts only that a "small number" of Barclays' traders were aware of efforts to rig a series of short-term interest rates to benefit their own desks' trading positions.

In a clear damage limitation exercise, Diamond wrote to finance committee chair Tyrie last week seeking to clarify the settlement Barclays had agreed with US and UK regulators.

Diamond sought to separate the actions of the traders over a sustained period of years from those of the bank during the momentous days following the collapse of Lehman Brothers.

He stressed Barclays lowered its submissions to the Libor panel during the height of the financial crisis to "protect the reputation of the bank from negative speculation". A higher Libor submission would have indicated that the bank was in financial trouble, a suggestion Barclays denied at the time, blaming ill-founded media reports.

Diamond wrote: "The inaccurate speculation about potential liquidity problems … created a real and material risk that the bank and its shareholders would suffer damage. It was, as you will recall, a period of extraordinary turbulence and uncertainty."

Or, as the FSA's report explains, a Barclays manager ordered an employee to lower his Libor submission "to send the message that we're not in the shit".

It appears Barclays was by no means alone in trying to protect its reputation. As the financial crisis raged, several Barclays' employees told the City watchdog, the Financial Services Authority, the BBA and the Bank of England that all the banks that comprise the Libor panel "were contributing rates that were too low".

The revelation has raised questions about whether the authorities should have acted sooner. A spokeswoman for the BBA said: "We are looking into claims about when this was brought to our attention."

Yesterday, Treasury sources confirmed there is to be an urgent review into how Libor operates and suggested there could be criminal sanctions for those who abuse it.

Critics of the system have claimed that the scandal was the inevitable consequence of a casino-style culture that has thrived so aggressively across the City over the last decade.

But if so politicians must share the blame. It was Gordon Brown who in his Mansion House speech in 2006 boasted how he had resisted a "regulatory crackdown" following the accounting scandal that brought down telecoms giant WorldCom. Brown promised the City a "predictable and light touch regulatory environment".

As he prepared to question Diamond this Wednesday, when the UK's highest paid businessman appears before the Treasury select committee he chairs, Conservative MP Tyrie warned: "The public's trust in banks has been even further eroded. Restoring the reputational damage must begin immediately." For this reason, the Barclays chief executive remains very much in the line of fire. "Diamond must go," said the former Lib Dem Treasury spokesman Lord Oakeshott. "The criminals must be charged and convicted whether in Barclays or other banks, brokers or hedge funds."